People of the State of New York v. Bank of America Corp, Kenneth Lewis, & Joseph Price – Examining the Martin Act & Securities Enforcement in New York State (Part I)

On February 4, 2010, New York State Attorney General Andrew Cuomo filed a civil complaint against Bank of America (“BofA”), its former CEO and Chairman of the Board of Directors, Kenneth Lewis, and its former CFO, and now president of Consumer, Small Business and Card Banking for BofA, Joseph Price (collectively the “Defendants”).  Cuomo has alleged that the Defendants violated New York’s Martin Act by committing securities fraud in connection with BofA’s acquisition of Merrill Lynch.  Specifically, Cuomo has alleged that the Defendants fraudulently concealed from BofA shareholders information regarding Merrill’s deteriorating financial condition during the proxy solicitation process in advance of the December 5, 2008 shareholder vote approving the merger that led to an additional $20 billion TARP payment to BofA.

On February 22, 2010, Judge Jed Rakoff of the Eastern District of New York approved Bank of America’s settlement with the SEC, arising out of an SEC complaint based on allegations that BofA violated Section 14(a) of the ’34 Act and SEC Rule 14a-9.  The SEC filed two complaints against BofA (Case Nos. 09-CV-6829; 10-CV-0215).  The February, 2010 settlement was the second of two attempts to satisfy Judge Rakoff, after he rejected the first proposed settlement advanced by the SEC in September 2009.  Judge Rakoff’s February opinion that approved the settlement addressed both of the active complaints.  For purposes of this post, we only consider the second of the two SEC Complaints, filed on January 12, 2010.

Cuomo, unlike the SEC, named two former BofA officers in his suit.  In order to understand the decision to name executive officers, New York’s Martin Act is worthy of examination.  Over the course of this series, the Race to the Bottom will analyze Cuomo’s pending suit against BofA, Lewis, and Price.  After this introductory post, the second part will examine the background of the Martin Act and its use in recent history.  Upon establishing the background and context of the Martin Act, the third part will compare and contrast Cuomo’s suit with the earlier SEC suit and settlement.

New York passed the Martin Act (the “Act”) in 1921, and the Act is codified at Article 23-A of the New York General Business Law.  The Act gives the New York State Attorney General broad civil and criminal enforcement powers in the securities fraud context.  The Act proscribes “false representations, engaging in deception, fraud or false pretense, or concerning any material facts . . . [in the sale of securities].”  State v. Samaritan Asset Mgmt., 874 N.Y.S.2d 698, 703 (Sup. Ct. N.Y. County 2008).  The New York Attorney General can pursue a permanent injunction – enjoining persons that have taken part, directly or indirectly, in fraudulent practices – monetary penalties, and restitution against alleged violators of the Act.

In conjunction with Sections 352 and 353 of Article 23-A, Attorney Generals frequently rely, as does Cuomo in the BofA case, on New York Executive Law Section 63(12).  Section 63(12) establishes (1) the broad definition of fraud under the Act: “any act which could be characterized as misleading or dishonest;” and (2) that “proof of an intent to defraud is not essential.”  Samaritan Asset Mgmt., 874 N.Y.S.2d at 703 (emphasis added).

As early as 1926, with People v. Federated Radio Corp., 244 N.Y. 33, 38-39 (1926), the Court of Appeals of New York established the broad swath that the Attorney General can cut with the Martin Act:

The purpose of the [Martin Act] is to prevent all kinds of fraud in connection with the sale of securities . . . and to defeat all . . . schemes in relation thereto whereby the public is fraudulently exploited.  The words ‘fraud’ and ‘fraudulent practice,’ in this connection should, therefore, be given a wide meaning so as to include all acts, although not originating in any actual evil design or contrivance to perpetrate fraud or injury upon others, which do by their tendency to deceive or mislead the purchasing public come within the purpose of the law.

That early decision makes clear that scienter – required in a SEC Rule 10b-5 claim – is not required in a Martin Act case.  A civil enforcement action under the Act requires (1) a misrepresentation or omission; (2) falsity; and (3) materiality.  Thus, while Rule 10b-5 private actions require, among other elements, scienter, reliance, and damages – see, e.g,, Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 342-43 (2005) – those elements are irrelevant for Martin Act claim.  Lastly, CPC Int. Inc. v. McKesson Corp., 70 N.Y. 2d 268 (1987), confirms that there is no implied private right of action under the Act.

Comments

[Kate McKoy]

Nice Piece Jeb. Welcome to the world of financial fraud. I would love to think you will focus your good sense and ethical lawyering on being a Plaintiff or "Claimant Only" Attorney. I have chosen to be a Plaintiff Only Expert Witness in Financial Fraud (I possess the CFE Credential) and my expertise lies in the following areas: Securities Fraud, Money Laundering & Raqueteering in Corrupt Organizations (State & Federal/Corporate & Natural), Whole Life & Viatical Settlement Insurance Fraud, Equity Indexed & Deferred Variable Annuity Fraud, & Affinity Fraud. My choice to represent Plainitffs exclusively was one of conviction and based on the ideal ofmaintaining my integrity in all of my life, including my business dealings. The rewards I have received thus far have been plentiful, the accolades have been few, but the satisfaction derived from serving up justice to fraudsters and the awards my work has helped secure for financially injured fraud victims, as well as the gracious client thank you letters I have received, make everyday a great day to be alive. I was blessed to be born with the tenacity to continue to wake up swinging every morning, forging ahead and fighting the good fight to support my cause. My cause is Financial Exploitation of the Elderly, as they are the most targeted and vulnerable victims in the areas of my practice. I have performed many gratis fraud examinations, for trial, arbitration and settlement, due to Seniors being left financially devastated by the perpetration of fraud on their life savings and retirement accounts.There can be no bigger reward than knowing you helped secure and restore financial security to those who have been robbed of it. I wish you the very best in your bright and shining future and urge you to work for the good guys. We need you. Keep up the great literary work, as your writing talents are a gift and you need to continue to use those gifts to educate others. Please give some thought to using your legal talent to help others who need help from a competant, ethical and compassionate attorney and advocate.